| Article 4 |
Reviews of Emerging Stock company financial reports are categorized as either formal reviews or substantive reviews.
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| Article 5 |
All Emerging Stock companies are subject to formal review by the TPEx of the annual and second quarter financial reports. The TPEx conducts formal reviews according to the Formal Review Checklist.
If the formal review of financial reports has found that the financial report submission is not in compliance with regulations, the documents filed are incomplete, or the CPA issues an audit report with other than an unqualified opinion or review report other than an unqualified conclusion, affecting the fair presentation of the financial reports to the extent that a restatement is required, or there are significant deficiencies in the internal control system, the TPEx, within 3 working days after the deadline for submission of the financial report, will report to the Financial Supervisory Commission (the "competent authority"), and list the company as one that must be audited under Article 6.
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| Article 6 |
With respect to substantive review and regularly scheduled audits of the financial reports of domestic Emerging Stock companies, the TPEx, for auditing based on the annual financial reports and for auditing based on the second quarter financial reports, will select at least 5 percent of the ESB companies (not including those that have applied for TPEx listing or TWSE listing), and select 3 percent of the PSB companies, as companies to be audited, and within 1 month after the deadline for submission of the financial reports, the TPEx shall report to the competent authority for recordation the names of the companies to be audited, the reason for their selection, the reasons why an on-site audit is required, and the key points for audit, and within 2 months thereafter the TPEx shall complete the substantive review work and then report it to the competent authority for recordation, and when necessary, the TPEx may file with the competent authority for approval of an extension of the substantive review period. However, if an Emerging Stock company fails to forward its financial report by the prescribed deadline, the deadline for its substantive review shall be calculated from the date the company forwards the financial report.
The TPEx will select companies to be audited based on the following criteria:
- Audit selection based on the following standards:
- A relatively major year-on-year change in operating revenue, operating income, or net income before tax for the same period.
- Substantial investment loss in the share of the profits/losses of associates and joint ventures accounted for using the equity method.
- Purchases from or sales to related parties, or receivables from related parties or advance payments to related parties, or shareholding or asset transactions with related parties, involve substantial amounts or involve irregular transaction conditions.
- The amount of real estate acquired or disposed of in the current period reaches NT$100 million and accounts for 3 percent or more of the total assets at the end of the period (this does not apply to acquisition or disposal by construction companies of land to be used for construction).
- An excessively high amount of endorsements or guarantees.
- The combined amount of loans to others at period-end reaches 10 percent or more of equity, or the increase in loans to others in the current period reaches 3 percent or more of equity.
- Poor financial ratios.
- Major changes in accounting items.
- The net cash flow from operating activities in the current period is outflow and the amount reaches 3 percent or more of total period-end assets; or the net cash flow from operating activities in the current period declined by 50 percent compared to the amount of the preceding period and the amount of the decline reaches 3 percent or more of total period-end assets.
- The amount of increase or decrease in non-current equity investment in the current period accounts for a relatively high proportion of equity.
- The company has been registered as an ESB company for two full fiscal years or longer (inclusive of the PSB registration period), but has not applied for listing on the TPEx (or TWSE).
- A company that meets any criterion below will be categorized as a company that must be audited, provided that if after analysis it is deemed unnecessary to perform an audit, the company need not be so categorized:
- Irregularities are found at the company based on the formal review of its financial reports.
- There has been a material change in the company's scope of business.
- Any of the criteria in items C. or F. of the preceding subparagraph apply, while the amount of the relevant transactions is also large, and the company has not undergone a special audit in the preceding period.
- The period-on-period increase or decrease of the intangible assets in the current period has reached NT$100 million, and accounts for 20 percent or more of the total assets.
- The discrepancy between the self-assessed un-audited operating revenues and the figures audited (or reviewed) by the CPA reaches 5 percent or more.
- There have been consecutive deficits in the most recent 3 years and the incremental amount of current pre-tax income as compared to the same period of the preceding fiscal year reaches 30 percent or more of the amount of share capital stated in the financial report. In the case of shares having no par value, or a par value other than NT$10, for the calculation of the aforementioned 30 percent of share capital, 15 percent of net worth shall be substituted.
- The audit committee or the remuneration committee cannot be convened due to the dismissal of independent directors.
- The TPEx deems audit necessary for any other reason.
For a company selected to be audited under the preceding paragraph, each item set out in the substantive review checklist shall be audited in detail with respect to whether its accounting treatment violates relevant laws or regulations or generally accepted accounting principles. Additionally, prior to conducting regularly scheduled special audits, the key audit items and the audit procedures shall be drawn up. Standard audit procedures for regularly scheduled audits shall be separately prescribed by the TPEx. After concluding the audit, the TPEx shall produce a report on the regularly scheduled special audit, the content of which shall include the following items:
- The effect on the company of the key audit items, and an explanation of the company's response measures.
- The lead advisory recommending securities firm's opinion on the auditing of the relevant audit items and evaluation opinion, and when necessary, an opinion on related matters issued by the attesting CPAs.
- Any violation of securities-related laws or regulations discovered during the audit.
- The TPEx's comprehensive analysis opinion, recommendations, and adopted measures.
Among the audit items, attention shall be paid to the following matters:
- If there are any material discrepancies in the monetary amounts of any items in the period-on-period balance sheets or comprehensive income statements, whether any irregularities are involved.
- Whether derivatives transactions have been duly disclosed.
- Whether there are any irregularities in related party transactions.
- Whether funds were loaned to another party for any reason other than loans necessary for company business transactions.
- Whether there are any irregularities in the purchase or sale of block assets.
- Whether any endorsement or guarantee was made for others for any reason other than as necessary for company business transactions.
- If any published material information has an effect on operations, whether any irregularities are involved.
- Follow-up on any material events or audit conclusions of material irregularities indicated in the Financial or Operational Material Event Checklist filed by the lead advisory recommending securities firm, or on any irregularities listed in the previous substantive review or audit of the financial reports.
If and when necessary during the review period, the TPEx may require the Emerging Stock company's lead advisory recommending securities firm to perform an audit of the audit items and present its evaluation opinion, and may contact the attesting CPAs and ask them to give an opinion, or requisition the CPAs' relevant working papers. After completing the review of a financial report and a regularly scheduled special audit, the TPEx shall explicitly express a review conclusion and an opinion on a concrete method of handling. After the special audit reports for the selected companies have been issued, the TPEx shall continue to monitor those companies to ascertain any change in their operational status.
If the audit referred to in the preceding paragraph finds the existence of any of the following circumstances, such circumstances shall be handled immediately, and the advisory recommending securities firm shall be notified by letter:
- If a material irregularity or violation of securities-related laws and regulations is discovered, whereupon the TPEx files a report with the competent authority for handling.
- If a material deficiency is found in the internal control system, whereupon the TPEx files a report with the competent authority and requests that the audited company engage a CPA to conduct a special audit of its internal control system and issue a review report.
- When there is any violation of TPEx bylaws, whereupon a disposition is made in accordance with regulations.
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| Article 6-1 |
With respect to substantive review and regularly scheduled audits of the financial reports of foreign Emerging Stock companies, the TPEx, for auditing based on the annual financial reports and for auditing based on the second quarter financial reports, will select at least 35 percent of the ESB companies (not including those that have applied for TPEx listing or TWSE listing), and select at least 20 percent of the PSB companies, as companies to be audited, and a foreign Emerging Stock company must be selected for auditing at least once every 5 years. Within 1 month after the deadline for submission of the financial reports of foreign Emerging Stock companies, the TPEx shall report to the competent authority for recordation the names of the companies to be audited, the reasons why a special audit is required, and the key points for audit, and within 2 months thereafter the TPEx shall complete the substantive review work and then report it to the competent authority for recordation, and when necessary, the TPEx may file with the competent authority for approval of an extension of the substantive review period. However, if a foreign Emerging Stock company fails to forward its financial report by the prescribed deadline, the deadline for its substantive review shall be calculated from the date the company forwards the financial report.
The TPEx shall audit in detail each item set out in the substantive review checklist with respect to whether its accounting treatment is reasonable. Additionally, prior to conducting regularly scheduled special audits, the key audit items and the audit procedures shall be drawn up. After concluding the audit, the TPEx shall produce a report on the regularly scheduled special audit, the content of which shall include the following items:
- The effect on the company of the key audit items, and an explanation of the company's response measures.
- The lead advisory recommending securities firm's opinion on the auditing of the relevant audit items and evaluation opinion, and when necessary, an opinion on related matters issued by the attesting CPAs.
- Any violation of securities-related laws or regulations discovered during the audit.
- The TPEx's comprehensive analysis opinion, recommendations, and adopted measures.
The provisions of paragraph 2 and paragraphs 4 to 6 of the preceding article shall apply mutatis mutandis when the TPEx conducts substantive reviews and regularly scheduled audits of the financial reports of foreign Emerging Stock companies.
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| Article 7 |
All domestic and foreign Emerging Stock companies are subject to formal reviews of financial forecasts, and the formal reviews are conducted in accordance with the formal review checklist. If any material submitted or publicly disclosed is incomplete, or the period between the date of public announcement and filing and the date of preparation exceeds the prescribed period, or the CPA issues other than an unqualified review report, the TPEx shall compile all such matters and report them to the competent authority by the 10th day of the month following the date on which the Emerging Stock companies forwarded the reports to the TPEx.
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| Article 8 |
All domestic and foreign Emerging Stock companies are subject to substantive reviews of financial forecasts, which are done on a selective audit basis. Verification, and reporting to the competent authority, of the audit report shall be completed within 2 months after the compilation report for formal reviews mentioned in the preceding article is reported to the competent authority. When necessary an application may be filed with the competent authority for approval of an extension of the substantive review period. However, if an Emerging Stock company fails to forward its financial forecast by the prescribed deadline, the deadline for its substantive review shall be calculated from the date the company forwards the financial forecast.
If any one of the following circumstances exists, in addition to being selected for audit, a company may be subject to a spot audit in any quarter, depending on the circumstances:
- For Emerging Stock companies that publicly disclose complete financial forecasts:
- Explanatory text for the quarter is not updated in that quarter, but is updated the following quarter.
- There is a decline of 30 percent or greater in comprehensive income in the updated (or corrected) financial forecast relative to the original forecast, and the amount of the decline exceeds NT$150 million.
- A company's self-assessed un-audited figure for comprehensive income or CPA audited and attested comprehensive income, reported after fiscal year end, declines by 20 percent compared to the figure for comprehensive income in the most recent publicly announced and filed financial forecast, and the amount of decline reaches NT$30 million and 0.5 percent of the share capital stated in the financial reports, and also, compared to the comprehensive income in the original forecast, declines by 30 percent and in an amount exceeding NT$150 million. However, in the case of a company whose shares have no par value or a par value other than NT$10, 0.25 percent of equity shall be substituted for the calculation of the aforesaid 0.5 percent of share capital.
- Comprehensive income in the updated (or corrected) financial forecast changes from surplus to deficit, and the amount of discrepancy exceeds NT$100 million or the updated (or corrected) pre-tax losses reach NT$50 million.
- Questions are raised by external parties about a change in basic assumptions.
- For Emerging Stock companies that publicly disclose summary financial forecasts:
- A decline in comprehensive income in the current quarter, as audited or reviewed by a CPA, of 10 percent or more from the figure for the current quarter in the most recent publicly announced and filed financial forecast, and the amount of decline exceeds NT$50 million.
- A decline of 10 percent or more in comprehensive income for the current quarter in the updated (or corrected) financial forecast relative to the figure for the current quarter in the original financial forecast, and the amount of decline exceeds NT$50 million.
- Comprehensive income for the current quarter in the updated (or corrected) financial forecast changes from surplus to deficit, and the amount of the difference exceeds NT$80 million or the updated (or corrected) pre-tax losses for the current quarter reach NT$30 million.
- If forecasted comprehensive income is presented in interval estimates, calculation of the decline in comprehensive income for the selection of companies pursuant to the preceding paragraph will use the arithmetic mean of the upper and lower limits of the intervals for current quarter comprehensive income in the original and the updated (or corrected) financial forecasts.
For a company selected to be audited under the preceding paragraph, each item set out in the substantive review checklist shall be audited in detail, and the following matters shall also be noted:
- Whether there are any irregularities in the CPA review report.
- Whether the basic assumptions in the financial forecast are reasonable.
- Whether there are any irregularities in the timing of the update (correction) or restatement of the financial forecast.
- Whether all necessary items are included in the summary of major basic assumptions in the financial forecast.
- The improvement of any deficiencies or follow-up review of any irregularities listed in the previous review.
The following matters shall be noted in evaluating whether the Emerging Stock company has delayed the updating (or correction) of its financial forecast:
- The difference between audited companies' pre-update estimates and their self-assessed un-audited figures shall be monitored each month. If the difference between those figures meets the standard for the timing of updates, the cause of the difference between the standard and actual update times, and its basis, shall be ascertained.
- The time of occurrence of the cause for a financial forecast correction shall be monitored in order to ascertain the cause of the difference between the time of its occurrence and the actual time of the correction, and the basis of the cause.
- Supporting evidentiary information and the reasonableness of the explanation of the reason for the update (or correction) by the audited company shall be analyzed.
The following matters shall be noted when assessing the reasonableness of the basic assumptions of the financial forecasts:
- Material differences between the audited company's financial forecasts before and after the update (or correction) shall be compared, the main cause of the differences shall be ascertained, and the reasonableness of the materials for evaluation of basic assumptions shall be analyzed item-by-item.
- Historical financial information on the audited company for the preceding 2 fiscal years shall be analyzed to determine if there are material discrepancies with the financial forecasts for the current year, and their cause and reasonableness shall be ascertained.
- A relevant analysis report for the audited company's industry shall be obtained, and financial forecasts of other companies in the industry shall be compared in order to understand trends in the industry's business cycle.
- It shall be ascertained whether the audited company's revenues have been overestimated or expenditures underestimated in the projected figures for non-operating revenue and expenditures. If the audited company plans disposal of non-current financial assets or major assets, then an objective and accurate price reference or appraisal report shall be obtained as a basis for determining the reasonableness of the figures prepared by the company. When an evaluation on the estimates of the share of the profits/losses of associates and joint ventures accounted for using the equity method is conducted, then materials related to changes in relevant industries, the same industry, or the securities markets shall also be obtained to facilitate analysis and judgment.
If necessary during the review period, a CPA may be engaged to provide opinions, or the attesting CPA's relevant working papers may be requisitioned in order to ascertain whether the attesting CPA performed the review in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants as well as generally accepted auditing standards or relevant Statements of Auditing Standards. After completing the review of a financial forecast, the TPEx shall explicitly express a review conclusion and an opinion on a concrete method of handling.
If any irregularity in Article 6, paragraph 6 is discovered in an audit under the preceding paragraph, in addition to rapidly handling the matter in accordance with the preceding paragraph, the TPEx may, if any of the following circumstances is found to apply to the Emerging Stock company, give written notice that the Emerging Stock company has been issued one demerit and placed under consideration for selection under these Handling Procedures, with a copy sent to the competent authority for recordation. If the circumstances are serious, the TPEx may also impose a penalty of NT$10,000.
- The company has not timely updated (or corrected) its financial forecast pursuant to the Financial Forecast Regulations.
- The basic assumptions of the financial forecasts have not undergone reasonable evaluation.
- The financial forecast has not been approved by the board of directors, unless with legitimate reason.
- The company has not filed the relevant documentation pursuant to the Financial Forecast Regulations.
- The company fails to conduct public announcement and filing as required by the Financial Forecast Regulations and material errors or omissions exist.
- The company has been notified to make improvement or supplementation but fails to do so by the prescribed deadline.
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| Article 9 |
The competent authority may adjust the companies selected for audit on the basis of Article 6, Article 6-1, and Article 8 as it deems necessary. Review reports shall be retained for a period of 3 years, during which they may be requisitioned by the competent authority.
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